Do Borrowers Have To Do FHA Mortgages On HUD REO Properties?
George Souto provides a very clear and detailed explanation on the intricacies involved in financing a HUD foreclosure purchase. HUD properties can offer a great value but they normally entail more work and patience in the process of completing the repairs.
Do Borrowers Have To Do FHA Mortgages On HUD REO Properties? I wrote a blog yesterday titled "Repair Surprise To Avoid On HUD REO Properties". One of the comments on my blog was by Richard Weisser. Richard very correctly stated "It is a thousand times easier to eschew the FHA loan and go conventional. That takes the FHA appraisal and vendor estimates completely out of the picture." I agree with Richard that a conventional loan creates less challenges than FHA, and due to the recent FHA changes, a conventional mortgage is the preferable loan product when possible. However, many times it is not possible to do a conventional loan on HUD Real Estate Owned (REO) Properties.
The issue with HUD Real Estate Owned (REO) Properties is much the same as with other foreclosed properties, the condition of the property. If the property is in what is referred to in the Lending Industry as a "Functional Property", then a conventional loan is the preferable loan if the Borrower qualifies. But most often when a property is a foreclosed property, whether it is a HUD property or not, the homeowner many times gets very angry and does damage to the property. Depending on the level of the damage will determine whether a property will be considered a "Functional Property" or not.
A "Functional Property" is simply a property that is in livable condition, such as:
- Running water
- Heat
- Working electrical in all rooms
- Functional Kitchen
- Functional Bathrooms
- Flooring in Kitchen and Bathrooms
- Roof without leaks
- No exposed wires
- No broken windows (cracks are OK)
These are some of the major things which constitute a "Functional Property". As I stated previously homeowners get angry when they are foreclosed on, so they will:
- Rrip out toilets
- Rip out sinks
- Damage wiring
- Damage plumbing
- Even cut out sections of copper tubing
Most to the time none of these things on their own constitute a major costly expense, but they will cause a property to not be functional.
If the property is not a "Functional Property, then it needs to be made functional before a Clear To Close can be given to the Borrower. That means repairs need to be done before the Closing. This presents a problem with REO Properties, because REO Properties are owned by the Lender, usually a Bank or HUD. In most cases Banks will not let the Borrower go into the property to make repairs before the Closing because of liability. Banks (not all banks, but most) usually will also not make repairs to property once the property is under contract. So if repairs are required before Closing, and the Bank will not allow the Borrower to go into the property to make them, the Borrower will need to do an FHA 203K or FHA 203K Streamline Loan. This is because Fannie Mae and Freddie Mac will not allow money to be escrowed for repairs (the exception would be exterior repairs in locations which have cold, snowy winter months).
HUD will also not make repairs, or allow a Borrower to go into the property to make repairs, however, HUD will allow money to be put into escrow for repairs on HUD REO Properties which the Borrower will be obtaining an FHA Mortgage (HUD is FHA). Because the property is owned by HUD, HUD will make exceptionson to their own properties, which they will not make on other properties.
So while Conventional Financing is preferable, it may not be possible in the case of a HUD REO Property. Also the repairs maybe to small (under $5,000) for the added expense of a FHA 203K Loan to make sense.
So to answer the question Do Borrowers Have To Do FHA Mortgages On HUD REO Properties? The answer is No, but given the level of damage on most HUD REO Properties, a FHA Mortgage with money put into escrow for repairs, will most likely be the way to go.
My thanks to Richard for generating the idea for this blog, I wish I could give him half the points.
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Info about the author:
George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum,# Haddam,# East Haddam,# Chester,# Deep River, and# Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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